Nvidia Corp. is the most expensive stock in the S&P 500 Index, with its shares trading at about 23 times the company’s estimated sales over the next 12 months.
But there is a problem with that equation. In the era of artificial intelligence growth, no one can figure out what the producer’s money will actually be – not Wall Street analysts including Nvidia executives or Nvidia itself. So how should investors calculate whether stocks are worth it or not?
For more than a year now, increased demand for Nvidia’s chips fueled by the hype surrounding AI has made a mockery of Wall Street’s quarterly earnings estimates. Analysts don’t make up numbers, they take cues from management like they do in every other company. However, even Nvidia’s leadership is struggling to predict how much money the chip maker will make in the next three months.
Since Nvidia’s sales began exploding in its fiscal quarter ending in April 2023, revenue has exceeded the company’s own forecast midpoint by an average of 13%, more than double the average over the past decade. When Nvidia reported results in August, sales rose 23%, the biggest beat since at least 2013, according to data compiled by Bloomberg.
A representative for Nvidia declined to comment.
Ballparking Sale
Part of what makes Nvidia’s modeling so difficult is that supply is a highly uncertain variable when demand increases, which makes the chipmaker unique, according to Brian Colello, an analyst at Morningstar, who raised his price target for the stock to $105 from last month. $91. They are currently trading around $127.
Considering the continued improvement in Nvidia’s ability to increase supply, Colello said he added up to $4 billion to Nvidia’s quarterly revenue to park next quarter’s sales.
“I am not the first analyst to raise my price or fair value or to be surprised that the income is much higher than what we thought last year,” said Colello. “It’s been fun and rewarding but definitely challenging.”
Colello isn’t the only one raising his price tag. On Friday, Melius analyst Ben Reitzes raised his target price on Nvidia for the fifth time this year, to $160 from $125, which means he got a 26% gain from Friday’s closing price.
Of course, there are plenty of retailers buying Nvidia based on momentum. Nvidia gained 156% this year and surpassed Microsoft Corp. on Tuesday to become the world’s most valuable company at $3.34 billion. That rally helped drive a record $8.7 billion in tech funds last week through June 19, according to an analysis of Bank of America Corp. data. from EPFR Global. Shares of Nvidia have since fallen 6.7%, wiping more than 200 billion in market capitalization.
For investors who tend to view discounted income models as more volatile than ever, the gap between estimates and actual results has created a dilemma.
Over the past five quarters, analyst estimates for Nvidia’s sales have deviated from actual results by an average of 12%, according to data compiled by Bloomberg. That’s the third largest among S&P 500 companies that have posted average quarterly revenue of at least $5 billion in the past five quarters and have at least 20 analysts covering them.
What Price?
As Nvidia’s business grows and its major customers such as Microsoft promise to spend more money on hardware in the future, the main question for investors is what is the right price to pay for a profitable stock with sales growth much higher than its larger peers.
Based on current estimates, Nvidia is expected to deliver a profit of 14.7 billion dollars on sales of 28.4 billion dollars in the current quarter, up 137% and 111%, respectively, from the same period last year. Meanwhile, Microsoft’s sales are expected to rise 15% with Apple’s forecast sitting at 3%.
While Nvidia’s valuation multiple is rich, it looks more reasonable given Nvidia’s growth, especially considering that valuations keep coming down. For Michael O’Rourke, a market strategist at Jonestrading, the biggest concern is that the rate at which Nvidia is beating Wall Street’s growth expectations will start to decline soon, simply because of the company’s size. That can make it hard to justify the stock’s price tag.
“That’s where the danger comes in,” O’Rourke said. “You’re paying a high price for a large market company when stocks are trending lower and that’s likely to continue.”
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